Knowledge that Transforms

This paper studies kinship band networks as capital market institutions. Membership in a community where individuals are dynastically linked has two effects on informal credit. First, the nonanonymity of the dynastic link allows to sanction the defaulters’ offspring and induce compliance even in short-term interactions (social enforcement). Second, preferential agreements can arise in which kin members condition their behavior on the characteristics of a player’s predecessor, expecting others to do the same with their offspring (reciprocity). These effects are incorporated in an OLG game with endogenous matching between lenders and borrowers and tested using household-level data from Ghana.

In many empirical studies of the effect of social programs researchers assume that, conditional on a set of observed covariates, assignment to the treatment is exogenous or unconfounded (aka selection on observables). Often this assumption is not realistic, and researchers are concerned about the robustness of their results to departures from it. One approach (e.g., Charles Manski, 1990) is to entirely drop the exogeneity assumption and investigate what can be learned about treatment effects without it. With unbounded outcomes, and in the absence of alternative identifying assumptions, there are no restrictions on the set of possible values for average treatment effects. This does not mean, however, that all evaluations are equally sensitive to departures from the exogeneity assumption. In this paper I explore an alternative approach, developed by Paul Rosenbaum and Donald Rubin (1983), where the assumption of exogeneity is explicitly relaxed by allowing for a limited amount of correlation between treatment and unobserved components of the outcomes. The starting point of the sensitivity analysis is the assumption that the exogeneity assumption is satisfied only conditional on an additional unobserved covariate. Making assumptions about the effect of the unobserved covariate on the outcome and its correlation with the treatment, I trace out the set of possible values for the treatment effect of interest. By considering a sufficiently large set of possible correlations with outcomes and treatment, one can recover the bounds on the treatment effect derived by Manski (1990). The approach here, in the spirit of Rosenbaum and Rubin (1983) and Rosenbaum (1995), is to allow only a limited amount of correlation and to judge the sensitivity of average treatment-effect estimates to such correlations. There are two novel features of the proposed analysis. First, rather than formulate the sensitivity in terms of coefficients on the unobserved covariate, the sensitivity results are presented in terms of partial R values, which may be easier to interpret. Second, the partial R values of the unobserved covariates are compared to those for the observed covariates in order to facilitate judgments regarding the plausibility of values necessary to substantially change results obtained under exogeneity. The proposed sensitivity analysis is conceptually related to the practice of assessing sensitivity of estimates by comparisons with results obtained by discarding one or more observed covariates (James Heckman and V. Joseph Hotz, 1989; Rajeev Dehejia and Sadek Wahba, 1999; Jeffrey Smith and Petra Todd, 2001). The attraction of the sensitivity analysis is that it is more directly relevant: one is not interested in what would have happened in the absence of covariates actually observed, but in biases that are the result from not observing all relevant covariates.

A Picture Is Worth a Thousand Symbols: A Sociologist's View of the Economic Pursuit of Truth by Joel M. Podolny. Published in volume 93, issue 2, pages 169-174 of American Economic Review, May 2003

This paper develops an extremely simple formulation of the Laffont-Tirole principal agent model of cost-based procurement and regulation which is suitable for applied uses by restricting the principal to using a two item menu where one item is a cost-reimbursement contract and the other item is a fixed price contract.Menus of this form are called fixed-price-cost-reimbursement (FPCR) menus.In the case where the agent's utility is quadratic and the agent's type is distributed uniformly, it is shown that the optimal FPCR menu always captures at least three quarters of the gain that the optimal complex menu achieves.Therefore, at least for the uniform quadratic case, extremely simple menus with low informational requirements perform nearly as well as the fully optimal complex menu.

Physical telecom networks are costly and few, traditionally to the point of monopoly. Innovation thrives with many independent minds. So one might hope independent innovators, not only its proprietor M, can offer innovative services on a network, as has been true on the Internet. This issue is central in telecom policy; it also arises elsewhere, including complaints about Microsoft. I try to expound the following key points. Often an unregulated M has ex ante incentives to organize service innovation efficiently. But this incentive breaks down ex post as M can extract an independent J’s quasi-rents (Farrell and Michael Katz 2000). Even ex ante, the one monopoly rent theorem (Ward Bowman 1957) fails when M’s bottleneck access business is more regulated than its competitive services (e.g., Jean-Jacques Laffont and Jean Tirole 2000). This tempts M to sabotage J’s innovations. Quarantining M from the service sector solves these problems, but excludes the firm with (often) the best opportunities and the strongest incentives to innovate. Parity pricing or ECPR (Robert Willig 1979) purports to get the best of both worlds (BoBW). But it seems so hard to implement in innovation markets that one might construe ECPR analysis as reductio ad absurdum for BoBW.

Equity market liberalizations are like IPOs, but they are IPOs of a country's stock market rather than of individual firms. Both are endogenous events whose benefits are limited by poor investor protection, agency costs, and information asymmetries. As for stock prices following an IPO, there are legitimate concerns about the efficiency in the period following the liberalization of the stock market returns of countries that liberalize their equity markets. Equity markets of liberalizing countries experience extremely strong performance immediately after the liberalization, but then go through a period of poor performance. This pattern of stock returns is more dramatic for countries with poorer financial development before the liberalization.

The Carrot or the Stick: Rewards, Punishments, and Cooperation by James Andreoni, William Harbaugh and Lise Vesterlund. Published in volume 93, issue 3, pages 893-902 of American Economic Review, June 2003

Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden information, it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions. With moral hazard, optimal contracts involve just two levels of compensation. This is true even if performance measures are subjective, in which case optimal contracts terminate following poor performance.